Magnus, Inc. v. Diamond State Ins. Co.

101 F.Supp.3d 1046

MAGNUS, INC., Plaintiff,

v.DIAMOND STATE INSURANCE COMPANY, Defendant.

Civil Action No. 10–1422–KHV.

United States District Court, D. Kansas.

Signed March 31, 2015.

Frederick C. Davis, II, Kenneth H. Jack, Davis & Jack, L.L.C., Wichita, KS, for Plaintiff.

Bruce Keplinger, John Russell Hicks, Norris & Keplinger, LLC, Overland Park, KS, for Defendant.

MEMORANDUM AND ORDER

KATHRYN H. VRATIL, District Judge.

Magnus, Inc. brings suit against Diamond State Insurance Company to recover under insurance policies which Diamond issued to Precision Designed Products (“PDP”). Specifically, Magnus asserts that Diamond breached its agreement to insure and defend PDP with regard to claims which Magnus brought against PDP in Montgomery County, Kansas, Case No.2008CV119I.¹See Pretrial Order(Doc. # 49) filed August 25, 2014 at 13–14, ¶ 4. Magnus also asserts that Diamond unjustifiably refused to pay the insurance claim. Id.at 14, ¶ 5. This matter is before the Court on Defendant's Motion For Summary Judgment(Doc. # 17) filed July 11, 2011, plaintiff's Motion For Reconsideration Of Denial Of Oral Arguments On Summary Judgment(Doc. # 43) filed May 5, 2014 and the Motion Of Plaintiff, Magnus, Inc., For Partial Summary Judgment On The Question Of Insurance Company Liability For Payment Of The State Court Judgment (“Magnus Motion For Partial Summary Judgment”)(Doc. # 51) filed October 3, 2014. On March 24, 2015, the Court held a telephone conference with the attorneys in the case. For reasons stated at the conference and below, the Court overrules Diamond's motion for summary judgment, overrules Magnus's motion for oral argument and sustains in part Magnus's motion for partial summary judgment.

Legal Standards

Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56; accord Anderson v. Liberty Lobby, Inc.,477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Vitkus v. Beatrice Co.,11 F.3d 1535, 1538–39 (10th Cir.1993). A factual dispute is “material” only if it “might affect the outcome of the suit under the governing law.” Liberty Lobby,477 U.S. at 248, 106 S.Ct. 2505. The inquiry is whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law. Id.at 251–52, 106 S.Ct. 2505. A “genuine” factual dispute requires more than a mere scintilla of evidence. Id.at 252, 106 S.Ct. 2505.

The moving party bears the initial burden of showing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett,477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Hicks v. City of Watonga, Okla.,942 F.2d 737, 743 (10th Cir.1991). Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate that genuine issues remain for trial as to those “dispositive matters for which it carries the burden of proof.” Applied Genetics Int'l, Inc. v. First Affiliated Secs., Inc.,912 F.2d 1238, 1241 (10th Cir.1990). And, while the Court views the record in a light most favorable to the party opposing summary judgment, the nonmoving party may not rest on its pleadings but must set forth specific facts. Id.The nonmoving party cannot rely on ignorance of facts, on speculation, or on suspicion, and may not escape summary judgment in the mere hope that something will turn up at trial.Conaway v. Smith,853 F.2d 789, 794 (10th Cir.1988). If the nonmoving party's evidence is merely colorable or is not significantly probative, summary judgment may be granted. Liberty Lobby,477 U.S. at 250–51, 106 S.Ct. 2505.

Facts²

The following facts are undisputed.

Mike Sohm is chief executive officer of Magnus, which sells archery products.

Keith Jabben owns and operates PDP, which manufactures arrow components for the archery industry. For each year from September 21, 2001 through September 21, 2005, Diamond State Insurance Company issued PDP a commercial general liability (“CGL”) insurance policy. The policies contain substantially the same language and provide the same coverage.³

In August of 2002, Magnus and PDP entered into an agreement under which Magnus agreed to purchase certain aluminum broadhead adapters from PDP.⁴The record is rife with genuine issues of material fact whether the agreement required PDP to use a specific grade of aluminum. Magnus contends that PDP agreed to provide adapters made with 7075–T6 aluminum or 6061 aluminum if 7075–T6 aluminum was not readily available. PDP contends that it agreed to initially supply broadheads out of 2011 grade and to look into using 7075 grade in the future, but that it never agreed to supply adapters out of anything other than 2011 grade aluminum. Grade 7075–T6 aluminum is harder than 6061 grade aluminum, and 6061 grade aluminum is harder than 2011 grade aluminum. Whatever the parties' agreement, PDP supplied adapters of 2011 aluminum.⁵

The adapters which PDP supplied to Magnus were permanently glued to broadheads, so that arrow users could screw the broadheads on and off the leading or point ends of arrow shafts.⁶A typical arrow user may attach different broadheads with different types of arrow blades—depending on the type of game which he or she is hunting—and/or replace the broadhead with a target point for target practice. Typically, an arrow user can use a common broadhead wrench to remove a broadhead from an arrow. The ability to interchange broadheads is an important functional characteristic of an arrow. In addition, some blades are razor sharp and must be stored separately from the arrow shaft to prevent cutting and stabbing injuries.

On August 30, 2002, PDP issued Magnus its first invoice for the broadhead adapters.⁷

A month later, on September 30, 2002, Magnus informed PDP that it was experiencing problems with the adapters “seizing,” i.e.becoming permanently affixed to arrows.⁸Magnus stated that it was returning 1,000 pieces and suggested ways in which PDP could improve the design of the adapters. Id.The record does not disclose whether PDP incorporated the new design and if so, whether it resolved the initial seizing issues.⁹Also, the record does not reflect whether Magnus and PDP discussed the type of aluminum which PDP used for the adapters at that time.

About a year and a half later, on March 15, 2004, Magnus informed PDP that it had had a lot of problems with broadheads seizing onto customers' arrows, that customers were very upset and that under no circumstances should PDP make Magnus adapters with 2011 grade aluminum.¹⁰SeeMemorandum from Sohm to Jabben dated March 15, 2004, Exhibit V to Diamond Supplemental Brief(Doc. # 50).

Over a year later, on June 9, 2005, PDP issued Magnus its last invoice.¹¹

Magnus asserts that PDP provided adapters with a softer grade of aluminum than the intended application and the purchase order required; that the adapters “seized” or became permanently affixed to arrows; and that as a result, Magnus customers could not remove their broadheads or perform screw-off functions on blades or arrow tips. As a result, the arrows became worthless or had very little value and Magnus customers became unhappy with having their arrows ruined. Magnus attempted to remedy the situation by sending new broadheads at no charge, but it did not recall the products. Due to unhappy customers, Magnus suffered lost business profits and earnings.

On February 4, 2008, Magnus filed suit against PDP in Montgomery County, Kansas. Magnus alleged that PDP failed to supply adapters according to Magnus specifications, and asserted claims for breach of implied warranty of fitness, breach of implied warranty of merchantability and breach of express warranty. Magnus asserted that because PDP did not provide adapters made with 7075 or 6061 grade aluminum, it suffered decreased sales and damage to its business reputation.

In the course of the state court litigation, Magnus retained a financial expert witness, Steven D. Regier, C.P.A. In a report dated April 27, 2009, Regier opined that beginning in 2004, Magnus experienced dramatically reduced sales of products using broadhead adapters. SeeRegier Report at 2, Exhibit R to Diamond Memorandum(Doc. # 18). Regier estimated that as a result of the allegedly defective PDP adapters, Magnus lost a total of $284,519.75 in past and future earnings. See id.at 4. Specifically, Regier opined that from 2004 through December 14, 2009 (the state court trial date), Magnus lost earnings of $156,314.61. See id.at 3. Regier projected future lost earnings of $128,205.14. See id.at 3–4.

On August 9, 2009—18 months after Magnus filed suit—PDP notified Diamond and requested it provide a defense. Four days later, on August 13, 2009, Diamond provided written notice that it was denying the request based on various grounds. Specifically, Diamond quoted provisions of the CGL policy and stated as follows:

As you can see from the policy language, forms, conditions, definitions and exclusions [t]here is no coverage for property damage to your work/your product, nor for a defect, deficiency, inadequacy or dangerous condition in [y]our work/work product, or for a delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms, nor for any loss, cost or expense incurred by you or others for the loss of use, recall repair, replacement, adjustment, removal or disposal of your work/work product. There is no coverage for you/your company for any intentional acts or for any contractual liability. There is no coverage for property damage arising out of the use, or sale of firearms or other weapons. There would be a question of coverage due to late notice as well.... Diamond State Insurance Company does not waive any of its rights under the policy and specifically reserves its right to alter or

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